The WHT Article 23 Trap on Toll Manufacturing Services: When Third-Party Withholding Receipts Determine Tax Dispute Victory

Toll manufacturing services (jasa maklon), explicitly categorized as "other services" subject to Income Tax Article 23 (PPh Pasal 23 or WHT Article 23) based on Minister of Finance Regulation Number 141/PMK.03/2015, have once again become the focus of a dispute in Tax Court Decision Number PUT-003749.12/2023/PP/M.XIIIA Year 2025. This dispute highlights the tension between the formal compliance of the Tax Withholder (PT AGP) and the principle of substantial taxation, specifically concerning the obligation to withhold tax and the determination of the Gross Amount as the Tax Base (DPP). This case serves as a vital study for Taxpayers utilizing subcontracting services in the manufacturing industry, where the 2% WHT Article 23 correction made by the Tax Authority is rooted in the Taxpayer's failure to present valid withholding receipts.

The core conflict in this dispute

is divided into two dimensions. Firstly, the Director General of Taxes (Tax Authority) argues that every payment for toll manufacturing services must be subject to WHT Article 23 and since the Taxpayer could not present valid withholding receipts, the correction must be sustained. The obligation of the Tax Withholder is absolute and cannot be waived merely by claiming that the tax was paid by the service recipient. Secondly, the Taxpayer challenged the Gross Amount DPP used by the Tax Authority, arguing that the payment value subject to WHT Article 23 should only include the service fee and exclude reimbursement costs for the procurement of materials or raw goods.

The Panel of Judges

provided a resolution by partially granting the appeal, a verdict that reflects a consideration of the duality between formality and substance. The Panel agreed with the Tax Authority that toll manufacturing services are indeed subject to WHT Article 23. However, the Panel also provided an opportunity for the Taxpayer to have the correction canceled if they could present compelling evidence at the appeal stage that the WHT on the income had already been paid or withheld. A portion of the Tax Authority’s correction was annulled after the Taxpayer successfully proved the remittance of WHT Article 21/23 by other parties. This cancellation demonstrates the Tax Court's recognition of the principle of non-double taxation and the absence of state loss. Nevertheless, the Panel upheld the correction on the Gross Amount DPP where the Taxpayer failed to prove the segregation of the reimbursement component with detailed and convincing supporting documents.

The Analysis and Impact

of this decision bear significant implications. It is insufficient for Taxpayers merely to rely on the principle that the tax has been settled by the recipient party. This decision necessitates that the Tax Withholder fulfills its formal obligations, but it also offers an avenue for litigation by emphasizing the importance of substantial proof at the appeal level. The long-term impact is the urgency for companies receiving toll manufacturing services to restructure their contracts and invoicing mechanisms so that material costs can be legally and auditable separated from the service fee, complete with clear invoices and supporting documentation.

In conclusion,

this Decision reinforces the status of toll manufacturing services as an object of WHT Article 23 and confirms that a failure in formal withholding can be partially overcome if the Taxpayer can prove substantial tax compliance. The best strategy for Taxpayers is to comply with the withholding requirement diligently and, should a dispute arise, to complement their case with adequate tax payment evidence while ensuring the documentation for DPP reimbursement claims meets the judicial burden of proof.

A Comprehensive Analysis and the Tax Court Decision on This Dispute Are Available Here.